European stocks look set to start the new week with a higher open on Monday after finishing well off the lows on Friday. Renewed confidence that the US economy can withstand a rate hike after another strong jobs report is cushioning the blow of perceived under-delivery of monetary stimulus from the ECB.
On the day of the ECB meeting, EUR/USD saw its third largest gain ever with volatility that has only been matched during the 08/09 financial crisis. The fact that the euro has not added to gains since the ECB meeting has enabled some semblance of calm in European stocks. Looking further into the week, there is still a chance that disappointment from the ECB could weigh on global risk appetite. In the FX space, further euro strength after the ECB could cause broader dollar weakness.
A large part of the recent rally in European stocks was because of a belief in more stimulus. That belief will now be more muted. Without the pressure of additional monthly purchases, the euro and European stocks could now be more vulnerable to Fed policy and other external shocks.
Given that president Mario Draghi and the ECB have just taken action, it would be unusual to hint at more straight away without giving the latest measures time to have an effect on the economy. However, if growth remains sluggish and inflation well below target and officials keep reminding the market they have more “tools in the toolbox” then markets will eventually push for more.
There are a number of ECB officials speaking this week. The highlights could be
- Governing Council member Ewald Nowotny at 9am GMT in Vienna on Wednesday
- Executive Board member Benoit Coeure on Thursday in Brussels at 11.30am GMT
- Bundesbank President Jens Weidmann in Lisbon on Thursday evening after the close.
German industrial output figures for October reported at 7am GMT are expected to expand 0.8% MoM after two months of declines. Manufacturing has been weak driven by slower export demand from emerging market economies so any signs of recovery should be well taken, unless the result is excessive euro-strength.
Bank of England governor Carney speaks at 3pm GMT Monday ahead of the Bank of England policy decision and minutes released later in the week.
EURUSD– The euro’s huge reversal on Thursday, which engulfed the previous three weeks, has altered the short-term trend. Having failed to move below the March lows the euro is assumed to be in a medium term range and now a short term uptrend with support at 1.0790 then 1.0740.
GBPUSD– The pound has rebounded off the bottom of its downward-sloping channel with bullish RSI divergence and a bullish engulfing candlestick. This loss of short term momentum could signal a re-test of the 200 DMA around 1.53.
EURGBP– The euro-sterling cross has again returned back into its long term trading range. There is a possibility of an inverted head and shoulders pattern where the right shoulder finished at 0.70 and the neckline would be 0.75.
USDJPY– The dollar-yen is within a 122.20-123.70 trading range. The higher probability breakout is in the direction of the preceding uptrend while above the 200 DMA.
Equity market calls
FTSE100 is expected to open 32 points higher at 6,270
DAX is expected to open 91 points higher at 10,843
CAC40 is expected to open 35 points higher at 4,749
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